Moldova’s Economy and IMF Program Tokhir Mirzoev, IMF Resident Representative February 2013 Title Page

Outline Economic background Outlook IMF program

The economy is near-standstill… Decline in activity since Q3 2011… In 9 months of 2012 GDP declined by 0.2% vs 9 months of 2011. Key factors: eurozone + drought (cumulative quarters , growth over the same period of prev. year, percent) (twelve-month growth rates, percent)

External trade has declined as well… Both exports and imports are dropping since Summer of 2011, reflecting adverse conditions both domestically and externally (twelve-month growth rates, percent)

(year-on-year growth rates, percent) Remittances grew 2.8% in 2012 but remain volatile; budget revenues held up. (year-on-year growth rates, percent)

Growth in the financial sector shows signs of peaking amid elevated NPLs Credit growth remains surprisingly resilient, but banks’ NPL ratios have been on the rise since end-2011 (although spike in NPLs is largely due to BEM and reclassification)…

Amid low inflation and demand, bank interest spreads have narrowed Both MDL and FX bank interest spreads have been dropping while slowing domestic demand kept inflation low (Percent)

Past history points to good reasons to expect strong rebound in agriculture. Agriculture and GDP Growth, 2001-2012 (percent from previous year)

Outlook Growth looks to rebound on account of agriculture Inflation in line with forecast Fiscal performance will require an effort with BEM posing additional but manageable (one-off) risk Current account deficit could widen as demand recovers But significant downside risks still remain, especially due to external factors and the political uncertainty 2010 2011 2012 2013 proj. GDP growth 7.1 6.7 -0.6 4.0 Inflation, end year 8.1 7.8 4.1 5.0 Current account balance (% of GDP) -9.8 -12.6 -9.5 -9.9 Fiscal balance (% of GDP) -2.5 -2.4 -2.1 -1.5

IMF-supported Program Last program review remains to be completed (disbursement of remaining USD 77 million). Mission was postponed twice and program was extended till end-April. Completion of the program depends on the authorities’ resolute actions to stabilize BEM and willingness to maintain responsible fiscal policies

Looking ahead: key policy issues Banca de Economii A systemic bank for several reasons Urgent need for recapitalization Management needs to be strengthened In the medium-term, bank should be privatized Budget 2013 needs revision; many supporting policies were put in place (vignette, fuel excises) but there are worrying signs of populist initiatives Monetary policy should maintain low and stable inflation Structural reforms: Education, energy sector, financial sector, privatization

Thank You!